Corporate Raider vs Private Equity: The Masters of Business
Sir James Goldsmith: The Corporate Raider Who Warned Us
Dive into the fascinating world of corporate finance and learn how corporate raiders make money by spotting opportunities others miss.
“When you innovate, you’ve got to be prepared for everyone telling you you’re nuts.”
When you hear the term “corporate raider”, your mind may conjure images of self-serving opportunists carving up struggling companies for their selfish gains. The narrative spun by Hollywood and sensationalist journalism perpetuates this image. Yet, to label corporate raiders as some sort of evil supervillains would be an oversimplification. Much like a seasoned chess grandmaster, these individuals are savvy strategists. They excel at deciphering complex patterns, and capitalizing on opportunities others often overlook or ignore.
Viewing the business world as an intricate chessboard, corporate raiders play a high-stakes game where each pawn, rook, knight, and queen have a role. They’ve mastered the skill to strategize several moves ahead, and their endgame? To turn perceived “duds” into gold mines. How, you ask? It’s a meticulous three-step approach through which corporate raiders make money: Identify, Invest, and Innovate or Incise.
The strategy commences with raiders acting as discerning prospectors, scanning the business landscape for hidden gems.
Imagine a beach filled with pebbles. To the untrained eye, these stones hold little to no value. However, a seasoned prospector, well-versed in recognizing the uncut gem amidst the mundane, sees potential value. Similarly, corporate raiders have a knack for spotting undervalued assets and untapped potential in struggling companies. They’re not just looking for firms on the brink of bankruptcy, but those with inefficiencies, lackluster leadership, or unused resources — a gold vein ready to be mined.
Take the captivating tale of Marvel Entertainment. The late 1990s saw this comic book giant on the brink of bankruptcy. Yet its most valuable asset — a treasure chest of iconic characters — lay undervalued. To others, it was a sunken ship, but to Carl Icahn, it was a pearl in the ocean. He didn’t just see a failing business; he saw a repository of under-valued intellectual property. Today, Marvel’s pantheon of superheroes forms the backbone of Disney’s entertainment empire, infusing life into everything from movie franchises to theme parks.
Spotting potential is only the first move in this intricate game. The next entails taking possession of the undervalued asset — the uncut gem or the sunken pearl. Corporate raiders achieve this by acquiring a significant chunk of the company’s shares, often through a hostile takeover. Despite its ominous name, a hostile takeover is merely a strategic play, no different from a surprise checkmate on a chessboard. It’s a preferred move as it bypasses the company’s existing management who may resist the impending changes.
Consider the famous battle for Conrail, the freight railroad company, waged by the late Edward Burkhardt in the 1980s. Burkhardt, known for his expertise in railroad operations, targeted Conrail, which was newly privatized and underperforming. Although he failed to gain control of the company, his very interest pushed up the share price, allowing Burkhardt to profit handsomely when he sold his shares.
3. Innovate or Incise
Gaining influence over a company is akin to reaching a critical position in a game of chess. It sets the stage for decisive moves — moves that could sway the outcome. This is where corporate raiders either “innovate” by revitalizing the company’s product line or business model, or “incise” by implementing cost-cutting measures or divesting parts of the company. Each step is crafted to enhance shareholder value, which in turn drives up the company’s stock price. In certain cases, these two strategies blend seamlessly into each other, a yin-yang of creative destruction and rebirth.
Take the iconic transformation of IBM by Lou Gerstner. In the early 1990s, IBM, once a tech titan, was being outmaneuvered by more agile competitors and disruptive technologies. Gerstner recognized the potential in the beleaguered giant, successfully pivoting IBM towards services and software while also instituting stringent cost-cutting measures. This revitalized IBM, boosting its profitability, raising its stock price, and thereby providing substantial returns for shareholders, including Gerstner himself.
Pressure Is a Privilege
Raiders make money in two primary ways at this stage: through the increased value of their own equity stake in the company as its stock price rises, and through the sale of divested assets, especially if these parts are sold at a higher valuation than what they were assigned when the company was initially acquired.
However, this process is seldom without resistance. Incumbent management teams often deploy defensive measures such as poison pills, staggered boards, and golden parachutes to guard their own wealth and positions. These tactics, although designed as protective shields, often reinforce the very inefficiencies and lack of accountability that corporate raiders aim to combat. This underscores the importance of stringent regulations and corporate governance to keep the chess game of corporate control balanced and fair.
Corporate raiders are not the Wall Street bad guys they’re frequently portrayed as. They are skilled strategists in the intricate game of business, adept at identifying value, investing wisely, and innovating to maximize returns. While their methods might be controversial and contrarian, they have the potential to turn struggling companies into thriving entities, creating value for a broad spectrum of stakeholders.
After all, in the grand chessboard of business, victory doesn’t belong to those who maintain the status quo, but to those who can envision and actualize the board’s potential. For in both chess and business, the game is won by those who can think several moves ahead.